Premium Financing of Life Insurance: Why and When to Use it
February 21, 2013 
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If you’ve ever bought a house with a mortgage then you understand how to use other people’s money to leverage your assets to purchase something very expensive. Let’s combine that strategy with the purchase of high value life insurance. If you have a large estate value or a farm that you want to pass on to the next generation and ensure they have sufficient funds to pay any estate taxes without having to sell of any of the assets. Or maybe you are a business owner and you need a large life insurance policy on you and your business partner should one or the other of you pass away suddenly. Again, in this situation the business would not want to sell off assets to stay in business to acquire a new partner to continue the business.
Premium Financing of life insurance is a strategy that is used often by people to successfully purchase large value life insurance policies without having to use their own assets to pay the premiums annually. Typically it works like this; an individual buys a large life insurance policy (usually a universal or indexed universal life policy) – with a minimum death benefit of several million dollars – and has a bank or other financial institution pay the premiums needed for the policy.
The process looks like this:
Step One – The Application for a Life Insurance Policy
The applicant will be required to complete an application for a life insurance policy. They will also be required to have a medical exam completed along with having to provide financial underwriting to determine whether they qualify for the policy.
Step Two – The Application to Borrow the Premiums
The lender analyzes the credit and financial status, and decides whether or not to make the premium loans.
Step Three – The Lender Approves the Loan
The lender will pay the life insurance premiums annually. The interest on the loan can be paid or deferred until the loan is paid off. This can be at the end of the loan period, or when the insured person dies. Either way, the primary beneficiary is the lender until the loan is paid in full with the remaining life insurance benefits being distributed to the secondary heirs.
Current Economic Reasoning for Premium Financing
Certainly, the recent period of low interest rates has enhanced the appeal of premium finance. One potential reward of using premium financing relates to the spread between the loan interest rate and the rate of return on the asset that was not liquidated to pay premiums. The lower the loan rate, the higher the potential reward of the program.
At least for the foreseeable future and in the current low-interest rate environment, premium financing is gaining respect and interest as a tool of choice for the affluent needing to acquire large amounts of life insurance protection.
There are a significant amount of variables that go into creating the correct life insurance policy and finding the best premium financing lender. They will be different for each individual’s specific situation. Talk with a Tax Free Retirement Specialist to learn if this is the right product for you. CLICK HERE to find a local Tax Free Retirement Specialist in your area.
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